June 12 2015 – Friday – marked the end of the 2015 Legislative Session.  It was the longest legislative session in Kansas history at 113 days. The Legislature will return on Friday, June 26 for sine die – the procedural “last day”.  Legislators will have to take a vote on Friday, to correct an inconsistency in the final tax legislation.

Most of those who live and work daily with the Legislature would mark this session as a painful one.  The choices that were left on the table at the end were not what anyone would have wanted – passing the largest tax increase in Kansas history, when measured in terms of overall revenue at $385 million.   And, although Governor Brownback is painting the final tax legislation as consistent with the objectives of the “path to zero” income tax experiment, the Republicans who dominate the Kansas Legislature’s majority are hoping mightily that their efforts will have been enough to balance the budget for at least two years.  Some advisors have indicated that a least two elements of the revenue package are not reliable, and if the taxation of LLC guaranteed payments does not raise $23.7 m and the tax amnesty plan does not raise $30 m, legislators may have to raise taxes again next year.  That is something they will need to avoid, and hope that the voters won’t remember this session when they cast their votes in November 2016.

THE BUDGET

SB 112 is the mega-budget bill that had been agreed – for the most part – early in May by the conference committee and was ultimately adopted.  Read the conference committee report description here.  It was further amended by the budget conference committee to include most of the Governor’s Budget Amendments and a few omnibus adjustments.   

The budget bill includes cuts to most state agencies and flat funding for many others, while covering the increasing costs of Medicaid.  It provides for the next two fiscal years' funding and is on top of the FY 15 rescission bill passed early in the session (which cut nearly $100 million from FY 15), and separate funding bills for K-12 schools (the block grant bill) and the Judiciary.  The K-12 Block Grant Bill eliminates Kansas' school finance formula, replacing it with block grants.  The Judiciary Bill funds the Supreme Court and Judicial System at levels below their request, and includes a clause that will drop all funding for the Judiciary if the Supreme Court should rule against a 2014 law taking away the authority of the Supreme Court to appoint lower court judges.

It was a risky plan – to hold over the mega-budget agreement until the veto session and attempt to push it through without further major adjustments.  The Governor and administration officials wanted to keep the budget as agreed during the regular session and avoid deeper cuts into the agencies.  The Governor had promised K-12 and Regents Universities that no further reductions would be made. But for many legislators, the 4% state general fund cuts, the transfers of fee fund balances and reductions to existing programs already contained in the budget were forgotten in the months since the regular session.  Many were pushing for deeper reductions to state spending rather than voting for any kind of tax increases.   Estimates varied, but an additional 6.2% across the board state general fund cut was promoted as a way to close the $406 million gap and avoid tax increases altogether.  “Kansas doesn’t have a revenue problem, we have a spending problem,” was the quote often heard as the House and Senate each debated and rejected multiple variations of HB 2109 and SB 270 – the tax bills.

The threat level was increased in the first week of June, as Shawn Sullivan, Budget Director, warned legislators that the state might have to lay off thousands of state employees if the budget bill was not adopted soon.  The House moved forward and adopted H Sub for SB 112 with no debate on June 3.   The Senate, however, would not debate the budget bill until it had approved a revenue package.  Saturday, June 6, the House and Senate quickly adopted a brief change to Kansas statute to prevent state employee furloughs.  The temporary fix in SB 11 classifies all state employees as “essential” for the balance of the month of June.  This prevents the furlough of 24,000 state employees deemed “nonessential” who received notices on Friday.  Read KHI article.

Sunday, June 7, after passing the conference committee report on S Sub for HB 2109, the revenue package – raising $406 million revenue in this version – the Senate adopted H Sub for SB 112, the major budget bill of the 2015 legislative session.  Although many hoped the Senate action would lead to House approval the next day – and adjournment, it would be five more days (and two more very late nights) before the veto session would end.

To form the state budget for FY 15, FY 16 and FY 17, in addition to H Sub for SB 112, the Legislature passed a rescission bill (further reducing the FY 15 budget early in the session), a Judiciary budget bill, and the K-12 block grant funding bill. 

THE REVENUE PACKAGE 

Read an outline of the tax legislation HERE. It took 113 days for the Kansas Legislature to pass tax legislation to pay for the FY 16- FY 17 State Budget and close a $406 million shortfall.  Ultimately, the Legislature chose to compel the Governor to take responsibility for $50 million of that total.  (Many have forgotten that the earlier proposals from the administration had filled in another $400 million through FY 15 allotments and internal transfers beginning in December 2014. 

The final tax package is a combination of S Sub for HB 2109 as adopted by the Senate on June 7 and the tax trailer bill H Sub for SB 270 – written to amend HB 2109 in order to gain passage in the House.   A third piece of the puzzle is the modified fee plan for managed care organizations proposed by the Governor’s original budget, which brings in $47.8 million by drawing federal funds into the Medicaid program.

Multiple combinations of revenue ideas were put forward, debated and ultimately voted up or down in the last 23 days of the session.  In some ways, the development of the revenue package was one of the most democratic processes we have seen in the Legislature for some time.  The Senate debated its tax bill for several days, with multiple amendments considered, before putting HB 2109 into conference committee.  Once in conference, it took five conference committee reports to find a plan that was not rejected by one chamber or the other.  This meant multiple floor debates in each chamber discussing the options.

The final tax package includes:

• -          State Sales Tax Increase from 6.15% to 6.5%  ($164 m)  (H 2109 as passed by the Senate increased to 6.55%)
• -          Increases cigarette taxes 50 cents per pack ($40 m)
• -          Amends the 2012 tax exemption for LLCs to tax “guaranteed payments” ($23.7 m)
• -          Reduces itemized income tax deductions ($97 m)
• -          Creates tax amnesty program for delinquent tax payments ($30 m)
• -          Freezes income tax rates that are scheduled to decrease ($26.4 m)
• -          Raises $384.7 million for FY 16 (H 2109 as passed by the Senate would have raised $406 m)
• -          Requires the Governor to cut an additional $50 million to reach an ending balance of $86 million for FY 16   (We do not know where these cuts will occur, although a significant portion is likely to come from IT.)
• -          Eliminates income taxes for the state’s 388,000 lowest income tax paying citizens in FY 17
• -          Sets a 2.5% limit for revenue growth – triggering income tax rate reductions whenever revenue exceeds the limit (H 2109 as passed by the Senate included 3% limit)
• -          Maintains the current food sales tax rebate (H 2109 as passed by the Senate repealed the rebate, but reduced the sales tax rate on food to 4.95%.   Legislators hope that reducing food sales tax rates can be achieved in a future session.)

When the Senate approved S Sub for HB 2109 on June 7, it included two very controversial sections.  First, the sunset of numerous sales tax exemption statutes by 2018 – with a committee created to review and recommend whether or not those exemptions should remain in law.   This provision caused great concern for hospitals, non-profits and others.   The section was dropped from the final package, but the Legislature plans to spend time next session reviewing sales tax exemptions for possible repeal.  This exercise has been done in the past, without successfully reforming the exemption statutes in the way that proponents would like to see.

Second, a property tax lid provision that would require a public vote whenever local governments raised property taxes beyond a certain rate.   The final package loosens the restrictions, allowing for increases based on rate of inflation, infrastructure, road construction, bonds and interest, state and federal mandates, etc.

At the end, there was a joint meeting of House and Senate Republicans where the Governor’s staff threatened terrible budget cuts within 3 days.  Legislative leaders urged the caucus to make the very difficult votes needed to end the session.   Democrats and moderate Republicans held firm, unwilling to go on the record voting for any tax increases – most stating that they would not help to solve the budget problems they believe were caused by the income tax cuts of 2012 and 2013.  This meant that the Republican conservatives were then fragmented into smaller contingents, mostly including what could be called the center right and the ultra-conservatives.  It was these groups that had to forge a compromise to adopt a revenue plan in order to balance the budget.  But for some to move away from their anti-taxation principles was extremely difficult, and there were rifts created and relationships marred.   The lessons of the 2010 and 2012 elections were quite clear – with groups such as the Kansas Chamber, Americans for Prosperity, and the Kansas Policy Institute raining postcards into legislative races against those deemed as “tax and spend” politicians.  It will be interesting to see how many conservative Republicans will have to pay a similar price in 2016 for voting for the 2015 tax increases – being touted as the largest tax increase in Kansas history.

Read KHI Article: Why the Legislature is Struggling to Pass a Tax Plan.